Chapter 13 SB
Which of the following can make a product line look less profitable than it really is?
Allocated common fixed costs
Potential advantages of dropping a product line or other segment include
An overall increase in net operating income Avoiding more fixed costs than the company loses in contribution margin
Average costs
Contain sunk costs Are often misleading
T/F: Depreciation of existing assets is relevant to decisions.
False
T/F: Opportunity costs are not found in accounting records because they are not relevant to decisions.
False
Irrelevant costs include
Future costs that do not differ between alternatives Sunk costs
Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.
Irrelevant
Future costs and benefits that do not differ between alternatives are _________ costs to the decision-making process.
Irrelevant
If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.
Keep
A company must make a volume trade-off decision when they
Must trade off units of one product for units of another Do not have enough capacity to satisfy all product demand
Opportunity costs should ______ be included in a make or buy analysis.
always
Anything that prevents you from getting more of what you want is a(n)
constraint
When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n)
constraint
A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in
contribution margin
When a constraint exists, companies need to focus on maximizing
contribution margin per unit of constraint
The first step in decision making is to
define the alternatives
Focusing on future costs and benefits that are not the same between the choices is
differential analysis
The key to effective decision making is
differential analysis
A business segment should only be dropped if a company can save more in _______ costs than it loses in contribution margin.
fixed
One of the great dangers in allocating common _____ costs is that such allocations can make a product line look less profitable than it really is.
fixed
When making a volume-trade off decision, managers should ignore
fixed costs
When there is a constrained resource, the best way to increase profits is to
increase the capacity of the bottleneck
A joint product should be processed after split-off if the
incremental revenue after split-off exceeds the incremental processing cost after split-off
Joint costs are
irrelevant in decisions regarding what to do with a product after split-off
In order to prevent confusion and keep attention focused on critical information, it is desirable to
isolate relevant costs from irrelevant costs
The split-off point is the point in the manufacturing process at which the _______ products can be recognized as separate products.
joint
A decision to carry out one of the activities in the value chain internally rather than to purchase externally from a supplier is a ______ decision.
make or buy
Determining whether to carry out an activity in the value chain internally or use a supplier is a ________ decision.
make or buy
If a company has a resource that could be used for something else, the _______ cost is the profit that could be derived from the best alternative use of the resource.
opportunity
Space being used that would otherwise be idle has a(n) _____ cost of zero.
opportunity
The potential benefit given up when selecting one alternative over another is a(n)
opportunity cost
When planning a trip and deciding whether to drive or fly, the _________ is a sunk cost and should be ignored.
original cost of the car
Effectively managing an organization's constraints is a key to increased
profits
When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n)
relevant cost
It is profitable to continue processing a joint product after the split-off point, so long as the incremental ______ from such processing exceeds the incremental processing cost incurred after the split-off point.
revenue
A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n)
sunk cost
When demand for products exceeds the production capacity, a(n) ______ _________-________
volume trade off
A special order should be accepted
when the incremental revenue from the special order exceeds the incremental costs of the order
When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) _________ cost.
Avoidable or Incremental
T/F: When estimating the cost of taking a 300 mile trip, the average cost per mile × 300 is the best way to evaluate the total cost.
False
When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) ________ cost.
Irrrelevant
When is it profitable to continue processing a joint product after the split-off point?
It is profitable when the incremental revenue exceeds the incremental processing cost.
Costs that have no impact on future cash flows and are irrelevant to decisions are __________ costs.
Sunk
When considering accepting a special order,
There must be idle capacity Normal sales must not be affected
A cost that can be eliminated by choosing one alternative over another is a(n)
avoidable cost
Two or more products that are produced from a common input are known as _______ products
joint
Two or more products produced from a common input are called
joint products
A set of activities ranging from development to production to after-sales service is called
the value chain
When making a decision ________ costs and benefits should to be included in the analysis.
Only relevant
A company is considering buying a component part that they currently make using some existing equipment. Relevant costs to this sourcing decision include
Outside purchase price Variable overhead
When considering decision alternatives, only relevant costs are included when using the ______ cost approach
differential
The point in the manufacturing process at which joint products can be recognized as separate products is called the ________ point.
split-off
A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n) _____ cost
sunk
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative
income statement
When making a decision, only relevant items are included in the analysis of the alternatives when using
the differential cost approach only
T/F: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.
true
Activities ranging from development to production to after-sales service are called a(n)
value chain